In this episode of Motley Fool Money, Chris Hill chats with Motley Fool analysts Jason Moser and Andy Cross about the latest headlines and quarterly reports. They have news on a surprising potential acquisition, impressive results in the CRM and SaaS space, some stocks hitting all-time highs and some lows. They share some stocks to keep on your radar and much more.
Also, Chris chats with lead advisor of Millionacres, Matt Argersinger, to make sense of the commercial real estate space.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Aug. 28, 2020.
Chris Hill: Shares of Walmart (NYSE:WMT) rose 6% this week and hit a new all-time high on Friday after the retail giant confirmed it is teaming up with Microsoft in a bid for TikTok, the wildly popular Chinese social media app. TikTok is close to selling its operations in the U.S., Canada, Australia, and New Zealand in a deal expected to be in the range of $20 billion to $30 billion. Andy, this is moving pretty quickly, so it's quite possible by the time people are listening to this the deal is already done. But when I first saw this news, it didn't make any sense to me why Walmart would get involved here.
Andy Cross: Yeah, I think that probably was a little bit of a shock to many people, but the more I thought about it, it kind of makes a little sense, Chris. So, just think about what Doug McMillon, the CEO at Walmart, has been doing in their e-commerce business, trying to have so much success, even before the COVID-19 lockdowns, and having that success, partnering with, for example, the likes of Shopify they announced earlier on. I mean, Walmart has a very large e-commerce presence; one of the largest sites out there, their e-commerce business is going gangbusters right now. They generate a lot of profits and cash, as does Microsoft. And so, I think when Walmart is looking to expand their audience, maybe continue to compete with Amazon when it comes to third-party sellers; they have 450,000 third-party sellers -- Walmart does, that's a fraction of what Amazon does. So, again, to expand its reach, reach a different audience, TikTok may not be so much of a stretch depending on what price they can get.
Now, there's big numbers being tossed out of $30 billion or so, but I'd be surprised if TikTok can get that. But I see it as a way for Walmart to really expand into a different audience, expand its advertising business and build out its e-commerce platform in a way that it would be very tough to do on its own.
Hill: Jason, if you're Microsoft shareholder, would you rather see Microsoft go all-in on this, or do you like the idea that a company like Walmart is helping to spread the risk around, because they're going to pay for part of it?
Jason Moser: I would rather see Microsoft just take this on its own. I think the bigger risk probably is on the Walmart side; just given what the business does, given the history of the business, kind of, how it built itself up to this point in physical retail. So, personally I'd rather see one party as opposed to many, but we'll cross that bridge when we come to it. It does seem like an odd combo. But from TikTok's perspective, you have to figure they, TikTok, are trying to figure out how to be more than just an ad play, right?
What we know about the business today, it's very little. We know they have a big network of people that use the platform, and we know they don't make a heck of a lot of money and it's essentially just an advertising play. And that's a very tough space with plenty of incumbents that do really well already. But if you're not Facebook or Alphabet, then you're just part of this, sort of, a collective of mediocre businesses that are taking a little bit of what is a very big pie there. I mean, Twitter it's just kind of a mediocre business, Snap is just kind of a mediocre business. And TikTok faces that same fate if they don't figure out how to become more than just an ad play.
So, you've seen Facebook, with Instagram, trying to get into social commerce. Twitter has made some bets here and there with that as well, as has Snap. So, it's understandable that Walmart would view TikTok from that perspective, and that TikTok would be looking to do that. It's just going to be a very interesting situation if it is a consortium that ends up acquiring TikTok, because you have more people trying to determine, more companies trying to determine the fate, which typically can be a more difficult thing.
Hill: Andy, a lot of speculation of what Walmart might do with this, but you got to like the fact that Doug McMillon is keeping his cards pretty close to the vest. He's not really saying [laughs] how they're going to use it, he's not saying whether it's going to be part of the Walmart+ service that they're going to roll out later this year.
Cross: Yeah, not surprising, just the quality of management that Doug has been able to showcase, and just the type of leader he is. It will be very interesting from the pricing perspective how much they want to pay if the deal does go through. There just aren't very many platforms out there. I think there are reportedly 800 million users of TikTok, and I'd imagine they're very active, they probably skew young. There aren't many platforms out there. So, when you look at the asset base, this is one that -- I think Walmart is one of the largest companies out there in the world is saying, listen, this is a place where we can maybe have some immediate impact in there to continue our transformation into much more of a larger digital company.
Hill: Shares of salesforce.com (NYSE:CRM) up 30% this week after second quarter profits came in more than double what Wall Street was expecting. And for a company of this size, Jason, their revenue growth continues to really impress.
Moser: Oh, yeah. Well, I mean, we say the same thing with companies like Amazon, they're lobbing 20%, 30%, 35% revenue growth on a quarterly basis. At that size it's just a phenomenal thing. And with Salesforce, I mean, we say how winners tend to keep on winning, and Salesforce has been a winner for a long time. It seems like they're taking the business [laughs] to the next level, to be honest. This most recent quarter, it is their first $5 billion revenue quarter; their highest operating margin ever. We're clearly starting to see the Tableau acquisition is proving to be a wise one in a data driven world. The Work.com platform that they built so quickly in response to the pandemic is ultimately delivering what Marc Benioff called this workforce command center that so many businesses need. They're helping companies all over the world really adjust to what is a new way of doing business going forward.
But a 63% increase in seven-figure deals from a year ago, big wins with companies like AT&T and PayPal, among others. In a world of no guidance, Salesforce not only gives it, but they raise it. So, now they're looking for about $20.8 billion in revenue for the full-year, $3.73 in earnings per share. That puts shares today at a very modest, Chris, a very modest [laughs] 72X full-year estimates. It sounds like a lot; it is a lot. But you know that old saying, you get what you pay for. And when you buy shares of a business like Salesforce and a leader like Marc Benioff, you are really buying into high quality that you can hang on to for a long time. So, big fan of this business and just not surprised at all, but very impressed with the results from the quarter.
Hill: Workday (NASDAQ:WDAY) is a Software-as-a-Service company that helps businesses with HR and finance. Shares up 25% this week after a great second quarter report, they also raised revenue guidance. Andy, I know we talk about the cloud a lot, but I feel like businesses like Workday are one of the reasons why. [laughs]
Cross: Yeah, Chris. I mean, same as Salesforce, another really impressive quarter from Workday. It's a $51 billion market cap company, so it's quite large. Revenues were up about 20%. Their subscription business to their cloud services was up more than that, up 23%, it is now 88% of the total sales with the other part being more professional services. They saw strong renewals across their product line. The subscription revenue backlog, which is what they expect to bring in going forward, was up 22%, with two-thirds of that now expected to be brought in over the next year, and that was up 21%. Gross retention of 95%. When you look at the net retention number, it's up more than 100%; if you include upsells into higher margin and higher priced offerings. They continue to expand their suite of human capital management and finance solutions to help very large clients. I think they have 60% of the Fortune 50, so it's a really big enterprise business. But their workforce, Chris, was down a little bit from the first quarter, so they really did a good job maintaining cost and their subscription business is looking to be growing at 20% to 21% going forward.
So, very much like Salesforce, Workday is really providing services in a very complex market, when so many companies are out there trying to take care of their employees, treat their employees as best they can with all different kinds of solutions, and then help, of course, the complicated world of finance and budgeting and processing; that world across large enterprises, Workday is really thriving there.
Interesting, Chris, they are now going to a Co-CEO model. Aneel Bhusri, who was one of the Co-Founders, is going to get a partner in Chano Fernandez, who has been there for a few years. This is a little bit different. Salesforce actually tried this, Benioff tried this, it didn't quite work out. But now Workday is seeing this as a way to split the CEO responsibilities up more effectively going forward.
Hill: I'm glad you mentioned that, because that caught my attention. Once you get past the great numbers for Workday, the move to the Co-CEO model, it seems like that works less often than it fails ...
Cross: Yeah, we're starting to see it a little bit more, Chris, it's interesting. So, Aneel is going to focus -- again, he's a Co-Founder of the business -- he's going to focus really on product, technology, and corporates. So, that's HR and finance; things he really cares about. He said he's excited to get back into strategy and product. And then Chano will oversee the more of the sales and marketing and customer relationship.
Again, you know, you're talking about very large clients, those are in businesses, those are very complex operations. And going forward, I think they're seeing a way to transition the responsibilities of the CEO and maybe even build for the future by bringing Chano into the CEO role.
Hill: Okta is in the business of identity management software. I don't know, Andy, I mean the profits look good, they raised revenue guidance, this seems a little bit like nitpicking, the sell off this stock.
Cross: Yeah, I think, well, the stock has done so well and it now sells at 38X sales. So, these high-priced stocks, even as well as they have been performing, I think if you don't continue to really outperform, the stocks tend to get hit a little bit. Revenues were up 43%; crossed over the $200 million mark subscriptions. Revenues were up 44%; most of their business is subscription-driven. The performance obligations to what they, again, expect to bring in over the next few years was up 56%; and just over this year was up 48%. So, again, looking forward to what they expect to bring in from their clients continues to be very high growth there.
Their gross margins were up a little bit, the subscription gross margin was up a tiny bit. Non-GAAP operating income was $6.5 million; that was 3.2% of revenues, versus a loss a year ago, Chris. So, from the profit perspective, from the guidance perspective, all looking pretty good. I think on that last point, the guidance is what might have people a little bit concerned. And [Todd] McKinnon, who is one of the Co-Founders of Okta talked about this as well. They are seeing some challenges from the COVID-19 pandemic in some of their small- and medium-size business; Okta does serve a lot of large clients when it comes to identity management, but for small business, they are seeing some challenges there. So, they're expecting for the third quarter revenue to be up 32% or 33%. So, again, a little bit of a deceleration from this quarter, I think that had some concerns, seeing some larger, longer sales cycles in their clients.
So, some challenges there. And with a high price multiple stock like Okta, again, if you don't continue to really express the very positive results, I think the stock will sell-off any given day.
Hill: Shares of Best Buy (NYSE:BBY) also hitting an all-time high this week. Second quarter online sales grew 240%. And yes, Jason, profits were also higher than expected. But online sales for 240%.
Moser: Yeah, that's a lot. I think the silver-lining for a lot of businesses during this pandemic is that it has given them the chance to redefine themselves and to prove their mettle in what is a new world going forward. I mean, a lot of businesses are really going to have to change the way they do things, and I don't know that it's going to ever really go back. And that's probably a good thing in a lot of ways, and Best Buy is certainly taking advantage of it and I think the market has rewarded it for really continuing to just consistently return some pretty impressive numbers in a difficult space.
And I think you made a very good point there in regard to the 240% online revenue growth as a percentage of total domestic revenue. Online revenue increased to 53% of total revenue versus 16% last year. So, again, you can see just tremendous growth there. And just to cap it all off, their domestic online sales have continued to really impress in quarter three. They're up approximately 175% right now, so just really impressive numbers.
And I think a lot of this just goes back to some interesting perspective that CEO, Corie Sue Barry noted on the call. Three concepts they believe that are permanent and structural implications from this pandemic in regard to the business environment, the retail environment. The customer shopping behavior will be permanently changed in a way. It just has to be more digital and put customers entirely in control to shop how they want, when they want, where they want. Two, the workforce needs to evolve in a way that meets the needs of those customers, while being more flexible not only for the customers but for the workforce. And then three, technology just continues to play an even more crucial role. And I think they're following those three ideas in helping to steer this business forward; and it's working.
So, for a business that a lot of us probably wrote off just a few years back, I mean, the numbers don't lie, really, they've continued to impress. And it looks like they're going to make it through this OK. And that omnichannel retail experience is paying off for Best Buy.
Hill: Second quarter same-store sales for Ulta Beauty (NASDAQ:ULTA) fell more than 25%, but online sales helped make up for that, and shares of Ulta Beauty up 12% this week, Andy.
Cross: Yeah, the online business was up 200%; so, similar to what we saw with Best Buy. Transactions up from the comp sales, so comparable stores transactions down 36%, not a surprise. And the average ticket was up about 15%. They are seeing the trend improving throughout the quarter. A lot of omnichannel benefits as they continue to see more and more consumers use the benefits of online and omnichannel programming. There's still some struggles, they're still very cautious about the rest of the year, especially in the fourth quarter that they think will be a little bit of a struggle when it comes to the holiday sales and some of the concerns still around pandemic. But obviously, it was a nice little bit of a rebound now what we're seeing from Ulta, a little bit of momentum improving from where they were a quarter ago when all the stores were closed.
Hill: Chicken McNuggets were introduced in 1983, and for the first time ever they're getting a little spicy. McDonald's announced its plans to start selling Spicy Chicken McNuggets in mid-September. It is one of two new limited time menu items, along with a Chips Ahoy McFlurry. I got to be honest, guys; it has been years, years since I have gone to McDonald's for anything other than the occasional breakfast item or coffee. I think this might change that for me; I think I might have to hit the drive-thru. [laughs]
Moser: Is it really changed or you just trying to be nice ?
Hill: No ...
Moser: I mean, I thought about this. Man, I'm with you in that, listen, Jason likes the chicken spicy, don't get me wrong. But No. 1, what took McDonald's so long? I mean, this is amazing to me. I mean, spicy chicken isn't something new. But then second of all, I don't know, man, McNuggets are still McNuggets. Like, at the end of the day they're still McNuggets. And I don't mean that in a good way. There are a lot of other options out there, some great options, some wonderful options, and I just don't know that McDonald's is really bringing me through the drive-thru for this particular offering.
Now, with that said, I'm glad they did it. Man, better late than never, but I'm just surprised it took this long.
Cross: I don't know, that spicy nuggets combined with the Chips Ahoy McFlurry, which I did not read about, but that's actually a combination; if I was more of a chicken eater, I think the pairing of those two would get me into the drive-thru.
Hill: And on a slightly more serious note, [laughs] this actually, I think, is a good sign for the restaurant industry. The fact that McDonald's is rolling out new menu items. We've been hearing for months about how new items have been on hold for McDonald's and others, so I think we're going to see more restaurants.
Matty, good to see you.
Matt Argersinger: Yeah, good to see you, Chris. Good to hear you; it's been a while.
Hill: It's been too long. Let's go big picture. What is the state of commercial real estate right now in your mind?
Argersinger: Good question. If I was giving the State of the Union speech, I would say it's not strong, it's probably a little uncertain, probably tepid. I think real estate, among any sector, really has been the most acutely affected by the pandemic, beyond of course, the human toll and the healthcare crisis that we're facing, of course, as well. But real estate, if we're thinking about asset classes, I just can't think of one that's been more affected given the lockdowns, the people working from home. I mean, there are just so many things that have happened that have made so many industries within real estate, if you think about retail, for sure; hospitality, for sure; and I know we're going to talk about office and all the dynamics there, people working from home and what does that mean for the future of office. I mean, I've studied real estate for a lot of years and I feel like 2020 [laughs] has changed so many assumptions and so many other things I used to think about real estate and how I used to approach the market. And it seems like it's changing day-by-day.
Hill: Yeah. In terms of the office buildings, I mean, it seems like everyone, and I'll include myself [laughs] in the category of everyone, everyone has at least a friend who works in a big office building in a big city, and they've been told or they're hearing that they're going to be exiting that building altogether. I know I've got friends who work in Downtown Manhattan, or were, and now they're probably not going to be.
How dire is it for, sort of, that category? I'm talking about the big cities, the 20-, 30-, 50-story office buildings. Are the dire predictions overblown or is dire a reasonable way to think about, at least, that category?
Argersinger: Well, I think you nailed it on the head when you, kind of, made it really specific to 10-, 30-, +40-story office building, skyscrapers in really, say, tier one markets like New York City, San Francisco, Chicago, what does the future look like for those kinds of offices? I think you could use the word "dire" in certain circumstances. First, if I look back, though, I look at traditional offices. I think there's probably a lot of big, noisy headlines right now. You'll read one survey, it might come from a homebuilder who says, oh, everyone is going to work from home, we're building big houses where everyone wants a home office, that's the new normal.
And you'll read another research piece that says, actually, no, it's really maybe 10% to 15% of employees are going to work from home, corporations think their employees are generally more productive at the office. I don't personally, anecdotally, I miss the office a lot; I think you do as well. There's certainly a dynamic there that's missing. And I think the majority of people are going to go back to work to the office in some capacity and very few are going to work from home full-time. But what does that mean for all kinds of offices? So, I think for something like a suburban office building or satellite offices around certain markets, I think those offices are actually kind of intriguing, right? I think that might be the wave of the future; people going to a closer to home type of office in more of a co-sharing location on a part-time basis.
But exactly what you said earlier, what does that mean for the traditional office building in New York City or elsewhere where you had employees commute in, oftentimes over an hour, to get to that building? And all the costs associated with those buildings, which are very expensive to lease. I think there is going to be a lot of displacement. I think we probably overbuilt in a lot of places.
New York City, which you mentioned, if you think about the sheer number of large financial institutions and banks, many of them have already said, hey, I think we're good, I think we're actually good. Like, JPMorgan has come out, Morgan Stanley has come out, said we're actually good with a lot of our employees, or at least a decent percentage of our employees, working outside the office. And so, I think there's going to be a big transition in, sort of, core markets like New York and San Francisco where there was the use of this office dynamic where people would commute in, and that's going to change. I think there's going to be a way to reuse those spaces, but in the short-term, lots of pain for a lot of those landlords.
Hill: A couple of weeks ago on the show we talked about the future of malls and, in particular, the reports of a deal between Amazon and Simon Property Group, largest mall operator in America. Not a lot of comments from either one of those [laughs] companies in the intervening two weeks, but do you think a deal where Simon Property essentially grants space to Amazon in what used to be Sears and JCPenney, does that make sense for both of those companies, does it make sense for one more than the other?
Argersinger: Certainly, I think it makes sense for Amazon. I think it's actually easy to think about. If you think about a mall, and specifically a department store within a mall, big space, columns are wide apart, windowless, high ceilings, easy to kind of come in, renovate, install new utilities. And by the way, a lot of these big department stores actually own the property. The mall actually doesn't own the anchor store in a lot of cases. And so, if you think about a lot of these retailers, you mentioned a few of them, but the Nordstroms of the world, Macy's, Sears of the world for sure, [laughs] they're just looking to exit as fast as they can.
So, if Amazon is the [laughs] highest or lowest bidder, doesn't matter, if Amazon is going to come in then it looks pretty compelling to, kind of, do that. And if you think about a location for that, malls are generally located near high density populations, so for a fulfillment center, the sort of the last-mile fulfillment center that Amazon is looking for, perfect. For Simon, [laughs] it's a lot more complicated. And I'm afraid, you know, I have mixed feelings about it myself. I think if you think about why malls exist in the first place, it's always been to draw traffic to anchor tenants like a Nordstrom or Macy's, right? So, you acquire these anchor tenants on cheap long-term leases. And then you have a bunch of in-line tenants, the smaller tenants, who thrive on the traffic that goes to those big stores. That's how a mall really worked. And a lot of these smaller tenants have co-tenancy clauses which -- so, if an anchor store leaves or changes in a dramatic way, they can actually leave or break their lease or at least get a reduction in rent.
So, for Simon it's a huge risk. I see Amazon as a great long-term tenant, but if I do that, am I sacrificing the rest of my mall, and making it much more difficult for my smaller tenants? That's where I'm a little concerned about what Simon can do in this case? Because in a lot of cases, it's really intriguing to work with an Amazon or a FedEx or some other, or a datacenter, like we've seen in a lot of places, but what does that do to the rest of the mall, does it undervalue the rest of the mall, I guess outside the food court, which still could be there, right, because you're still serving maybe everyone who works at the Amazon fulfillment center, but all the other retail tenants, they're certainly distressed even more, and they just really don't Amazon a few stores down from them if they're oftentimes selling the same things that Amazon is trying to fulfill to all their online customers.
And so, I'd say, for Simon, it's a lot more complicated, it's probably on a market-to-market basis as to where it works and where it doesn't.
Hill: Well, and also complicating things for Simon Property Group are these bids that they've been making for troubled retailers, Brooks Brothers, Lucky Brand Jeans, J.C. Penney. I'm trying to wrap my head around, on the one hand, they're looking to buy J.C. Penney, on the other hand, [laughs] they're looking to have J.C. Penney vacate space so they can give it up for Amazon. Does the acquisition strategy make sense to you?
Argersinger: I think in a lot of cases it's a brand play. So, Simon is coming in and saying, there's value to Brooks Brothers, there's value to even a J.C. Penney, a Forever 21, there's value to those brands. And if I can find a way to reposition them, either in an online capacity or in certain markets where I know it's going to work, in new developments I'm doing where maybe I'm doing a mixed-use development where my mall is turning into, you know, an apartment complex with some stores and some experience activities and things like that, and there's room to have those brands there where they're going to have a lot of traffic.
So, I think, to me, it's a branding and repositioning play. And if Simon can come in and pay cents on the dollar for a lot of these troubled retailers and apparel companies, there might be some value that can be created there, but it's definitely an interesting strategy, and I think in a lot of those cases, those purchases aren't going to work out, some will.
Hill: You mentioned home builders coming out and saying, we're building bigger homes, people are looking for offices where they can work or do the Zoom meetings or whatever. What about apartments and condos, doesn't that same type of thinking apply? I'm just curious, if more people are going to be working remotely, won't they also need, if they're not homeowners, but could we be looking at a next generation of apartment and condo building that actually provides a lot more square footage?
Argersinger: I think the case can be made for that; I think, ultimately, a lot of people are still going to live in cities or in places where there's -- especially younger people, where there's interesting things to do, there's entertainment or there's restaurants or there's just an ecosystem there that they like to be close to and live in. So, I think the apartment situation is not as bad as it may seem, but what I do think is happening is, you're going to see the rise of -- yeah, you know, homebuyers to a certain extent, but also what's called single-family rentals.
Just speaking from a real recent experience in Millionacres, we recently recommended a commercial real estate opportunity that was a built-to-rent single-family housing development. So, in other words, a developer was coming in, this was outside of Huntsville, Alabama, and building a bunch of houses. I mean, it looks like a suburban housing division, but they're all rental houses. And the idea there was, well, people want more space, they don't want any shared walls, they want their own HVAC system, they don't want to share ducts with other apartment units. And, again, in a post-COVID world, probably more desirable, right? [laughs] And so, that I think could be a little bit of the future of how people are thinking about rentals or apartments, it's more of a -- yeah, can I get more space? Can I get separation? Can I have, even, my own small yard that I can work with if I have children; that's a huge benefit.
So, again, it'll change. I don't see a lot of damage to the "multifamily sector" as much as others. I think the apartment is going to hold up pretty well. There is going to be some movement for sure, but certainly not a dire situation we see with retail hospitality or, of course, offices like we talked about.
Hill: Earlier this year, you and I were talking about REITs, and there are obviously different categories of REITs. And one that you talked about that piqued my interest was, REITs that are focused on warehouses, are those a growth area right now within the REIT industry?
Argersinger: Oh, they've certainly been a growth area. And if anything, the pandemic has accelerated, I think, the demand for warehouse fulfillment distribution properties. And so, STAG Industrial, you know, on the smaller side, or you got Prologis, which is one of the big major warehouse owners in the country. EastGroup Properties is another one. But these are all REITs that I think are, you know, were in the right place, and now really are in the right place in the real estate market. Industrial has really seen no drop-off; in fact, I was looking at STAG's tenant roll the other day, and they've gotten something like 97% of rent collections in the past quarter, whereas you look at several office -- I mean, we talked about New York City office -- Empire State Realty, they collected only 60% of their rent over the last few months, so it's complete contrast, right, where Industrial has seen virtually no drop-off in their real estate business where other sectors have.
Hill: Great conversation with Matt Argersinger. Always love talking to Matty. And it reminded me of the show we did early February 2019, right after Matt and his lovely wife welcomed their baby boy into the world, and we put together a special stocks on our radar, it was essentially the baby Argersinger basket of stocks, you can go back and listen to it, February 1st, 2019.
I went back and ran the numbers, guys. That basket of stocks is [laughs] crushing the market. The market, S&P 500 up 29% in the roughly 18 months since we did that show. The baby Argersinger basket of stocks up more than 80%. Ron Gross went with Carter's. Jason, you went with Square. Andy, you recommended The Trade Desk. Steve Broido, our man behind the glass, I think, to make fun of Ron Gross picked Titan International, the tire maker. [laughs] A legendary quote from Steve Broido, I have seen the future and it is round. But then Steve also got to double-down on one of the other stocks, so we doubled-down as well. So, Carter's, two bites of the apple of Square, The Trade Desk, Titan international; that basket is crushing it.
Hill: That's why we love the basket approach. All right, enough of that basket; enough of those radar stocks. Let's get to this week's stocks on our radar. Our man behind the glass, Dan Boyd, is going to hit you with a question.
Jason Moser, you're up first, what are you looking at this week?
Jason Moser: Well, Chris, as you know, this week we brought a new member of the family home, new little golden retriever puppy. And in honor of little Rider this week, I am putting Chewy on my radar. Ticker CHWY. You know I love the pet market; it's just a massive opportunity, plenty of tailwinds as more and more people are taking to having pets.
Last quarter they reported their first quarter, net sales were up 46% from a year ago to $1.62 billion. They added 1.6 million net active customers in the quarter, ending the quarter with 15 million active customers, that was up 3.7 million from the year ago. Autoship customers, I'm an Autoship customer now, Chris, too; let me just throw that in there. Autoship customers now represent 68% of total net sales. They launched a new fulfillment center in Charlotte to help get things to customers more quickly. Customer acquisition costs are coming down, margins are going up.
To me, it was interesting, at the end of the fourth quarter last year, they weren't offering full-year guidance, now they are. Earnings coming up here September 10th. I'll be very fascinated to see how they are doing. But as a happy customer that really just switched my pet shopping behavior over from Amazon to Chewy, this is one that I'm really keeping a close eye on.
Hill: Dan, question about Chewy?
Dan Boyd: Absolutely, Chris. I am also a big fan of Chewy. I am getting an Autoship package of cat food today; very excited about that. Jason, what are you looking for them to come out with for innovations or just good performance? What areas of their business are you looking forward to for them to really take over the pet food market?
Moser: You know, I don't know if it's really pet food so much, but if they could come up with some kind of like Roomba device that would just automatically go clean up the little puddles that Rider leaves around the house, that would be pretty sweet. I think we're good on the food, just get me the pee cleaner up and we'll be fine.
Hill: Andy Cross, a tough act to follow, what are you looking at this week?
Cross: Dan, I'm looking at Medallia, MDLA. A $4.9 billion company that provides customer experience insights and intelligence by collecting all kind of data points, like, from social media, and call centers, in-store experiences, online chats, product reviews, bundles it altogether in a cloud solution, provides it to more than 1,000 of the most popular brands in the world. They collect 6 billion of these experiences each year and their AI technology and algorithms can run 8 trillion calculations per day.
They report earnings next week, so I'm really looking to see how their clients are reacting to this environment, are they continuing to expand their relationships and add-on more higher margin services from Medallia. So, MDLA. Technology company, specializes in customer service insights.
Hill: Dan, question about Medallia?
Boyd: Yeah, sure. When I hear about this company, I only think of one thing, and that thing is, of course, Skynet from The Terminator films. This company scares me. Andy, how evil is Medallia? [laughs]
Cross: It's not quite as evil as Skynet; in fact, not evil at all. It's Founder-run; they own some stock. And it's a neat business to be able to provide those kinds of insights because so many customers -- and they have lots of plugins with Workday and Salesforce, ServiceNow, lots of different ways to be able to provide those client interactions, insights that customers really need as more and more people are turning to digital solutions.
Hill: Dan, do I even need to ask?
Boyd: You know what, Chris? I'm glad that you did anyways. I'm going with Chewy because I prefer pets over AI controlled digital solutions that will take over our lives in sometime in the near future.
Moser: Pets are greater than evil.
Hill: Jason Moser, Andy Cross; guys, thanks for being here.
Cross: Thanks, fellas.
Moser: Thank you.
Hill: That's going to do it for this week's Motley Fool Money. Our Engineer is Dan Boyd, our Producer is Mac Greer, I'm Chris Hill, thanks for listening, we'll see you next week.